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Australia's central bank does not see "strong case" for rate hike

Thu, Feb 08, 2018 - 5:08 PM

Australia's central bank does not see a "strong case" for a near-term rate increase even though it is optimistic a pick-up in economic growth would gradually spur inflation and reduce unemployment, governor Philip Lowe said on Thursday.

PHOTO: REUTERS

[SYDNEY] Australia's central bank does not see a "strong case" for a near-term rate increase even though it is optimistic a pick-up in economic growth would gradually spur inflation and reduce unemployment, governor Philip Lowe said on Thursday.

The Reserve Bank of Australia (RBA) has held rates at a record low 1.50 per cent since last easing in August 2016 to help stoke inflation, which has undershot its 2-3 per cent target band for more than two years.

But as its rich-world peers move towards unwinding stimulus and tightening policy rates, Mr Lowe said there was no reason for Australia to follow in "lock-step".

"The Reserve Bank Board does not see a strong case for a near-term adjustment in monetary policy," Mr Lowe said.

"If we do make progress, at some point it will be appropriate for interest rates in Australia to also start moving up," he said.

"While we do expect steady progress, that progress is likely to be only gradual," he added. "We are still some way from what could be considered full employment and our central scenario for inflation is for it to remain below the midpoint of the medium-term target range for the next couple of years."

The RBA sees CPI inflation between 2.0-2.5 per cent over the next couple of years, and underlying inflation a bit lower than that.

The bank's central scenario is for Australia's A$1.7 trillion (S$1.76 trillion) economy to grow "a bit above 3 per cent" over the next couple of years.

Recent volatility in financial markets that rattled global shares and caused a sell-off in the Australian dollar and other risky assets had not affected the country's growth outlook, Mr Lowe added.

He noted a string of positive data in recent weeks. In particular, employment had surged by 3.25 per cent over the past year.

Corporate profits have ballooned while measures of business confidence and conditions were strong as the drag from the end of a once-in-a-generation mining boom draws to a close.

A broad-based pick-up in global growth and higher commodity prices are also major boons to the export-driven nation, along with strong government spending on infrastructure projects.

The housing market, which was a key area of concern last year amid fears of a debt-fuelled bubble and bust, is also showing welcome signs of cooling, Mr Lowe noted.

However, one major area of uncertainty is downbeat consumer spending as household incomes and wages rise at a painfully slow pace.

"Some pick-up in wage growth would be a welcome development," Mr Lowe said.

"Ideally, this would be on the back of stronger productivity growth. But even if productivity growth were to be around the average of recent years, a faster rate of wage increase should be possible." A lift in wage growth was likely to be a necessary condition for inflation to pick up as desired, he added.